Sector Update

November 18, 2019



Yields slipped last week on (surprise, surprise), trade uncertainty. I opined two-weeks ago on reports both sides were searching where to sign a trade agreement as “getting the cart ahead of the horse”. For members of the press, reporting on this trade deal must feel like a modern adaptation of The Boy Who Cried Wolf, “The Journalist Who Cried Trade Deal”. Treasurys gave back 7-11 bps of recent increases last week on maturities ranging from 2-10 years. Still, yields remain higher on a month-over-month basis and by and large, the curve maintained its shape, only flattening 4 bps as measured by the 2y-10y spread. At the time of this writing, Treasury yields are 3 bps lower on renewed and/or continuing trade tensions.

 

Food for Thought

Of interest to investors, high-grade Taxable Muni spreads have pushed through where comparably-rated corporate bonds trade. Historically, this has not been the case, and is likely driven by an increase in taxable muni issuance. So, unless there is a paradigm shift occurring, which I see no evidence of, Taxable Muni spreads look attractive to investors who can cross-over and/or have discretion to move from Corporates to Taxable Municipal bonds.



Weekly Spread Commentary



What We’re Reading


Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (November) | Monthly, 5th business day

SBA Prepay Commentary (November) | Monthly, 10th business day

 

WSJ: Rewrite of Lower-Income Lending Rules to Advance in December

“In recent years, the law has become a source of conflict between community groups that want the rules to be enforced more strongly and bankers who argue the regulations are too bureaucratic and haven’t kept up with technological changes, among other criticisms. Banks are typically examined every three years on their CRA efforts. A bad grade effectively prohibits mergers.”


Sector Updates


Adjustable Rate Mortgage Market Update

Yield spreads on hybrid ARMs to Treasurys tightened a basis point or two last week, while mortgage-related sectors experienced spread widening.  The 15-year fixed-rate mortgage saw spreads widen 3 basis points and the 30-year fixed-rate mortgage experienced spread widening of 2 basis points.

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Agency Market Update

Last week, agency bullets largely moved in line with Treasurys, while callables continued to tighten versus sovereign debt.  Bullet spreads have not moved much in recent weeks and bullets are still trading at roughly the tightest spreads since May of this year.  Agency callables appear to be particularly rich from a relative-value standpoint and are now trading at the tightest spreads since May 2018.

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Fixed Rate Mortgage Market Update

Yield spreads for current coupon MBS to Treasurys widened last week. 30-year MBS widened by 2 bps to 98 bps, while 15-year widened 3 bp to 64 bps.

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Municipal Market Update

Municipal prices started the week steady, were stronger on Wednesday and Thursday, and steady again on Friday. New-issue offerings are forecasted to be $11.77B for the trading week.

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SBA Market Update

Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads. SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate SBA 7(a) pools had mixed CPRs for the month of November. Equipment loan pools declined slightly from October’s 16.6 to 16.1 CPR. Results on specific vintages were mixed, with the older and smaller pools generally increasing. Real-Estate loan pools increased from October’s 18.7 to 21.1 CPR.

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CMO Market Update

From a nominal spread standpoint, it’s been a quiet couple of weeks for the sector. Spreads for 5- and 10-year CMOs widened 1 basis point last week. PAC and Sequential spreads have moved only a basis point or two month-over-month.

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